Analyst Conference Summary

conference date: September 24, 2012 @ 2:00 PM Pacific Time
for quarter ending: August 31, 2012 (Q2, second quarter fiscal 2013)

[at the time this is written]
Forward-looking statements

Overview: Continued revenue growth, but EPS growth negative.

Basic data (GAAP) :

Revenue was $322.6 million, up 3% sequentially from $314.7 million, and up 15% from $281.3 million in the year-earlier quarter.

Net income was $35.0 million, down 7% sequentially from $37.5 million, and also down 13% from $40.0 million year-earlier.

EPS (diluted earnings per share) were $0.18, down 5% sequentially from $0.19 and down 10% from $0.20 year-earlier.

Guidance:

Assuming constant foreign exchange rates:

Fiscal Q3 2013 revenue $336 to $339 million, operating margin 24%, interest $2 million. $0.28 to $0.29 non-GAAP EPS.

Near $460 million full-fiscal year operating cash flow.

Conference Highlights:

Red Hat's storage business, Storage Server 2.0, was launched in the quarter, adding to expenses. Two small middleware acquisitions were made in the quarter, knocking $0.01 off EPS. Also introduced Open Hybrid Cloud.

Currency exchange rates hurt revenue by $14 million on a y/y basis, or $3 million sequentially, as the US dollar strengthened. Despite that revenue grew from all regions.

Non-GAAP numbers: net income $54.9 million, down 5% sequentially from $58.0 million, and down 3% from $56.5 million year-earlier. EPS was $0.28, down 7% sequentially from $0.30, and down 3% from $0.29 year-earlier. Gross margin was 86.2%. Operating margin 24.6%.

Believes next generation IT architecture for datacenters is a major growth opportunity for Red Hat.

All top 25 deals renewed, at 120% of prior value. 50% had a JBOSS component. 27 deals were a million dollars or greater. Government and financial services were the top verticals. Subscription revenue is now 86% of total revenue.

Subscription revenue was $278.8 million, training and services revenue $43.8 million.

Cash and equivalents balance was $571.6 million. Operating cash flow was $103.9 million, up from $77.1 million year-earlier.

Cost of revenue was $47.9 million, leaving gross profit of $274.7 million. Operating expenses were $224.8 million, up from just $182.2 million year-earlier, consisting of: sales and marketing $123.6 million, R&D $63.4 million, General and Administrative $37.8 million. Leaving income from operations of $50.0 million. Interest and other income was $1.5 million. Income taxes $16.5 million.

Hired 300 employees in the quarter.

Q&A:

Change in annual guidance? The change was due to the costs from the acquisitions, plus a slight revenue reduction on the services side.

Various software offerings? Middleware is growing faster than the core business, but we do not break out statistics. We are seeing progress in storage bookings, but that won't turn into revenue until next year.

Large deal activity color? Large RHEL customers are starting to significantly use JBOSS. We are still in the early days of middleware.

EMEA? Europe is holding up very, very strong, especially measured in Euros. We even saw strength in southern Europe.

In storage we are competing against well-established vendors, but their solutions are relatively expensive. We are seeing an exponential growth in unstructured data, with at best linear growth in IT budgets, so there is a lot of interest in our solutions. We are seeing a lot of interest in JBOSS as well.

The RHEV hypervisor is built into the operating system, which gives us a cost advantage over competitors. Virtualization is strategic for us, but the revenue growth is in RHEL.

Future of cash flow? We have good control of working capital. Good bookings and billings have driven increased cash flow.

Will Q3 deferred revenue positive surprise last year be repeated? As we have a recurring revenue model, typically each quarter of the year sees strengthening from a low in Q1 to a high in Q4.

We continue to see government and financials as our biggest verticals going ahead.

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